Chingo De Dinero

This past week the Fed mentioned they would purchase 300 MUSD in Treasuries, big deal, can’t impact me much, right?  Not really, the first thing you have to understand is to buy the 300 MUSD in Treasuries the Fed needs to pay…how do they do this, they “make” the money.  Yeah, that’s right, they just make the money.  Can they do this, why not?  They are in charge of the money supply.

So, now that you know how the Treasuries are bought, what is the effect?  Well, now there are 300 MUSD more dollars out there.  This money trickless down to people and given the great consumers we are, it will be spent.  With more people spending, sellers of goods can raise price.  BAM, inflation.  Will 300 MUSD alone cause inflation, no, but coupled with a lot of other factors, we could be in for some trouble.

What really gets to me is how I interpret this response to help the economy…spend our way out of it.  This can work in the short term, if not abused, but when you do it over and over and over, people are going to smarten up and stop selling, because in the end they are never going to actually get their return.  The easiest way for this to happen is a depreciation in the dollar vs other countries, which keeping Dollar output constant will result in losing ground vs others.

Of course, other countries are doing the same stuff, so relative we may be better off, none the less I would like to take the pain now, adjust consumption to what we really value, a shift the economy to improve this type of production.  The market is amazing efficient at this, especially compared to the government.

In looking at my stock quotes during the day, I could not help but to notice a large drop in price, but green being shown for the daily change.  The stock NCTY, traded at 16 on 1/28/2009, but then the following day traded in the low 15s, but showed an increase.  The reason, a $1.1 per share cash dividend.

It is amazing how this is factored in perfectly, so the true gain or lose are shown.  Basically, to ensure arbitrage is not present, a stock should drop by the same amount of its dividend, if not, you could buy right before the dividend, then sale right after, and pocket the dividend.  This also has to do with the term fair value used in pre-market figures.  It takes the previous day’s closing price and makes adjustment to show the actual change.

So, if you ever wonder why the stock price is down, but Google or Yahoo are showing an up, look at the dividend.

So, I just reviewed the GE quarter announcement, and I am a little worried that bad things may be coming.  Many analyst expected the dividend to be cut to keep the financial stability to keep the AAA rating.  This did not happen, what this means is that S&P or another credit rating agency could cut the rates, which will increase the cost of borrowing (Moodys will probably not cut it due to the ties with Sir Warren).  After this happens, GE will be in big trouble…with so much debt, the additional cost of borrowing will hit earnings, resulting in a decrease in investments in the various businesses, resulting in deterioration of their competitive advantage, which will hit the top line and start a nasty cycle.

If you look at the numbers, most of the cash generation is from the industrial side, which will probably tighten up mid way through this year.  Addtionally, you have to wonder how the current loans made by GE are…since many of them are through credit cards.  They do have a reserve for losses, but if it is large enough is a good question. If there is some unexpected weakness in the loan portfolio, along with a slowing industrial side, mixed with additional costs to renew debt…you are talking major trouble.

In looking at the actions of management, it looks like they are trying to build confidence, which could be a last grab at keeping the AAA and stoping the downward spirl.  Not cutting the dividend and raising money from Warren are two examples of management trying to get in the publics eye to prove everything is okay.  Although, I did see the recent debt having to pay 7%…a little high for how much debt is out there.  Lets see when it gets a little worse if we hit the slippery slope.